1 globaloxford economic forecasting vanessa rossi, oxford economics the global economy in 2007

GLOBAL 1 Oxford Economic

Forecasting

VANESSA ROSSI, OXFORD ECONOMICS

THE GLOBAL ECONOMY IN 2007


Forecasting

A Robust Global Economy

• The global economy has continued to forge ahead in spite of various obstacles being put in its way

• This summer saw a slowdown in US growth to under 3% while oil and commodity prices remain high – but global growth in 2006 will be above 2005

• This is partly due to the long awaited recovery in Europe, with growth above 2.5%

• But it also reflects strength in big developing countries, mostly China and India where growth is in the 9-11% range this year


Forecasting

0

1

2

3

4

5

6

1996 1998 2000 2002 2004 2006 2008

0

1

2

3

4

5

6

Source: OEF

World: GDP growth% year

PPP exchange rates

ForecastMarket exchange rates

% year


Forecasting

0

10

20

30

40

50

60

70

80

90

1973 1977 1981 1985 1989 1993 1997 2001 2005 2009

0

10

20

30

40

50

60

70

80

90

Source: OEF

$/barrel $/barrel

Real(1995 US prices)

Nominal

Oil price

F'cast


Forecasting

1978 1982 1986 1990 1994 1998 2002 200682

84

86

88

90

92

94

96

98

82

84

86

88

90

92

94

96

98

World

Oil market tight

ESTIMATED CAPACITY UTILIZATION RATE %


Forecasting

Risks to 2007

• Oil markets will continue to be tight and volatile – and even if crude prices fall, governments look set to the gap with taxes

• But oil no longer has a powerful impact on world growth – on its own it will not cause a recession

• Other concerns are the US and China – can growth keep going?

• And the financial market “wild card” may return – linked to global liquidity and Japan


Forecasting


Forecasting

10

20

30

40

50

60

70

2002 2003 2004 2005 2006

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Source: Haver Analytics

TRY/US$ (rhs)

Turkey: TRY & interest ratesTRY/US$%

Overnight borrowing rate(lhs)


Forecasting


Forecasting

US downside scenario

The slowdown underway in the US is certainly one concern for the global economy

A modest downside scenario for the US might be: A 10% fall in house prices over the next year A further fall in residential investment that takes

spending to 20% below its peak, rather than 15% AND in addition Flat rather than falling oil prices, plus a pick up in

wage inflation might constrain the Fed from cutting short rates


Forecasting

280

300

320

340

360

380

400

420

440

460

2003 2004 2005 2006 2007 2008 2009

280

300

320

340

360

380

400

420

440

460

Source: OEF

Nominal US house price index1980Q1 = 1001980Q1 = 100

Base forecast

Predicted


Forecasting


Forecasting

GDP growth Inflation Interest rates GDP growth Inflation Interest rates2007 2.6 2.7 5.4 1.7 3.4 5.52008 3.2 1.9 4.7 2.1 2.9 4.8

Impact of a fall in US house prices

United States

Central forecast Scenario


Forecasting

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

US & Italy GDP, annual % change% year

Source: SACE-OEF

US - scenario

Italy - scenario

% year

US - baseline

Italy - baseline

Forecast


Forecasting

Can Asia keep growth going?

• Technically Asia could sustain world growth - it is a large, fast growing part of world GDP

• So it could keep the average global growth rate high even if the US and EU weaken

• But is Asia too vulnerable to a US slowdown – how much does Asian growth fall if US growth drops by 1%?


Forecasting

JAPANCHINA

AllOther

Other Emerging

ASIA

US

EU 25 TOTAL

Global GDP at PPP - total $53tr in 2005

Source: OEF/WDI GDP at 2000 constant prices, PPP rates


Forecasting

0

2

4

6

8

10

12

100.00 1000.00 10000.00 100000.00

Source: OEF

World growth league (average 2006-2015)

Avg size of economy 2006-2015 (US$bns 2000 constant prices)

% a

vera

ge G

DP

gro

wth

200

6-20

15

India

Bubble size: scaledto population

(average 2006-2015)

ChinaTurkey

Mexico

Brazil US

EU25 excl UK

Russia

Japan

UK


Forecasting

0

1

2

3

4

5

6

2000 2003 2006 2009

0

1

2

3

4

5

6

World and US GDP growth% year

Source: OEF

Weaker US scenario

World GDP growth (at PPP)

% year

US GDP growth

Weaker US Scenario


Forecasting

0

2

4

6

8

10

12

14

2000 2003 2006 2009

0

2

4

6

8

10

12

14

GDP growth, Japan, China and Emerging Asia% year

Source: OEF

Weaker US scenario

Emerging Asia growth

% year

China GDP growth

Weaker US Scenario

Weaker US Scenario

Japan GDP growth


Forecasting

Can Asia support growth elsewhere?

• Weak trade prices help OECD consumers and keep inflation low

• Fiscal policy – encouraging expansions to boost growth in Asia may not be appropriate – but what about private demand?

• China’s consumer demand could grow faster – supporting growth and also cutting the trade surplus


Forecasting

Faster Chinese consumption?

Swing in GDP versus base after 1 year 5 years

Scenarios:

1% point per annum higher +0.6% +1.5%

Chinese consumer growth

And

Impact on China’s current account In US dollar billion -5 -

50


Forecasting

China’s risk is investment

• A collapse in China’s rampant rate of investment may be a bigger threat to Asia than a US slowdown

• High risk as investment for the 2008 Olympics is completed

• China’s growth could slump to 2-3%?

• But risk is most likely to 2009-2010 – and low impacts on US and Europe


Forecasting

-20

-10

0

10

20

30

40

1983 1987 1991 1995 1999 2003 2007

-20

-10

0

10

20

30

40

Source:OEF

% yearChina's risk is investment

GDP

Investment

% year

Exports

Forecast


Forecasting

Impacts on Global GDPCrisis in China in 2008-2009 like that of 1989 Investment and imports growth dives from +20% to –

15%

Swing in GDP versus base 2010

China -12 to 13%And impact on:US -0.5%Eurozone -0.8%Japan -1.9% HK and Taiwan -6.0%India -1.1%Korea and Thailand -4.0%

World GDP at PPP -3.5 to 4.0%


Forecasting

What can Europe do to respond?

• Be careful to keep the recovery going – policy should be flexible

• Maintain consumer sentiment – Europe’s property markets have been strong, unemployment is down and consumption has picked up this year

• Exporters: look for growth opportunities in the markets – follow demand

1 globaloxford economic forecasting vanessa rossi, oxford economics the global economy in 2007

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